How to evaluate a trader?

How to evaluate a trader?

This article will be helpful for those who are already investing or looking to invest the assets for AuM. It is very important to understand the criteria used to evaluate the quality of the managing trader. As for the professional traders, it is very helpful to reflect on their own statistics and analysis of the strategy.

Risk handling skills

One of the key professional qualities of the trader is the ability to handle the risk. In simple terms, it is a contingency plan to manage losing positions. The trader must clearly understand when and how to cut the losses, and asset management must be transparent and logical. With all of those qualities in tack, the trader has a fair chance to survive any market conditions.

What if a trader uses stop losses? In this case, it is important to make sure the risk is assessed properly.

If a risk spread is between 2% to 5%, there are 2 possible outcomes:

  • The error in the risk management calculations;
  • Trading strategy lacks basic discipline.

Both of those outcomes should make you alert.

The only exception is the situation when multiple strategies are deployed from the same account with different risk degrees. In this case, it is recommended to ask the trader to explain the fluctuation in the risk parameters. All of it is relevant only as a beginning risk factor at the opening of the trading position.

Stop-loss and Take-profit

These are key triggers used to manage the trading positions.


For every strategy, the only way to manage risk is to have a stop-loss in place. Using this tool allows us to mitigate potential losses if the price advances in the wrong direction. The amount of at-risk assets depends on the trader’s ability to generate a profit by risking this amount.

Using stop losses enables you:

  • Keep losses under control.
  • Relieve emotional stress.
  • Make sure the market situation was analyzed correctly
  • Enter the market at a precisely timed favorable position.


This is a tool that enables you to make profits. In fact, it is a limit order that is set to close a position after making a profit. There is a direct relationship between the profitability of the deal and the size of the take-profit position.

Profit/Loss analysis

The order book allows you to calculate how profitable and losing trades are related. The chances of making a profit directly depend on this indicator since it demonstrates whether a trader has the talent to correctly identify market trends.


Experienced traders will tell you that it is not necessary to identify the trend of the market in order to make a profit. One of the “golden” trading rules is to rely on small stop losses and large take profits. If, for example, the size of the stop loss is between one and three percent, take profits are set at the level of three to twenty percent.

The high Risk/Reward ratio allows for the possibility of errors when opening a position since in this case losses will potentially be offset by profitable trades.

Long positions

Let's review this example:

  • The trader has purchased a stock for $720 in order to make a profit on the price increase;
  • The risk level is set at 1% based on the invested amount;
  • In this case, the stop-loss will be set at $712.80.

If the price of the stock reaches the stop-loss amount the sell order will be executed and the loss will be $7.20,  or 1%.

At the same time, the take profit position will be set as well. Let's set it up at a 3% profit level which is $741.60. In case the price level will reach that number, the take-profit order will be executed resulting in a $21.60 profit.

The result:

  • Amount of profit — 3%;
  • Amount of risk — 1%.

The risk/reward ratio is healthy 3:1. This ratio allows it to break even with 3 losing trades and one profitable trade.

Short Positions

When a Short position is initiated the stop-loss and take-profit are used in reverse order. Stop-loss order limits the movement of the price upwards by 1% and takes profit when the price falls by 3%.

A different point of View

The opinions differ immensely:

  • Some believe the bird in hand is better than the elk in the bushes;
  • Others think the opposite is true when it comes to trading.

Both of those opinions are questionable at best:

  • Increasing the deposit, by achieving a very small profit, is time-consuming, requiring a significant number of transactions and a high level of expertise and understanding of the market.
  • Making money by employing "shocking" scenarios is an attractive perspective, but very few people can make good results in real life. After all, when you try to take advantage of the huge movement by using small stops it leads to a significant drawdown, the recovery process from which is extremely difficult.

The best option is when a trader approaches goal setting based on the average statistics for the market, while the emerging opportunities are used.

Those are a few nice solutions:

  • “Floating” target, when the decision to place a take profit is made after the assessments of the dynamics of the market are taken into consideration.
  • Trailing stops.

Looking through the statement (report), you should pay special attention to such transactions. If the trader, keeping the risk management in check, was able to achieve a profit exceeding the average, then it is necessary to study the market situation at that moment. The presence of a large falling or rising day is evidence of quality trading.

Traders who have been working for many years are beginning to understand how important the second part of the truth is widely known in their midst: "Cut your losses and let profits run".

Ability to form an advantage

This is perhaps the toughest part. Having familiarized yourself with a trader's strategy or trading plan, you can learn a lot about the character, but this will not help distinguish an experienced professional from a beginner. You can find out if you ask the trader what is his advantage. Experienced market participants know that trading success should be sought not in how the search for entry points is carried out, and not in the parameters of indicators.

Four major components of successful trades:

1.   Analytics (basic market conditions).

2.   Executions. It is an entry, exit, and following thru level.

3.   Money management.

4.   Psychological factor, helping a person to realize the ability to be mentally impartial to the market movement.

There is a shortcoming in the consistency of the approach used is indicated by excessive focus on one thing. Experienced traders understand the failures in trying to simplify the trading process. They do not need to be told about the importance of preparation and homework, which are a good addition to the rest of the system. Therefore, any conclusions can be drawn only after receiving an answer to the question indicated at the beginning of this section.

Quantitative parameters

The quantitative parameters of trading include the recovery factor, profit/factor, and some others. EXCEL spreadsheets are still widely used to analyze such indicators. Someone might point out that it is better to use a service that can analyze statistical data. Indeed, there are a few specialized services available on the market. But the old school participants still prefer Excel

After the analysis, it is necessary to compare the results obtained from the use of various trading instruments. In addition, it will be helpful to analyze the relationship between the size of positions and the results achieved. By this factor, you can determine how much a trader is able to keep risks in check.


The abbreviation PNL means Profit And Loss. This is a key indicator for both the investor and the trader. It is used to determine the state of the open position.

This indicator is calculated using the following formulas:

For Long position:

·    For Short position:

Let's take a look at this example:

  • The trader has purchased 4 BTC at  $25 000 each
  • Now each BTC is $49 000.

By using this data here is the result:

  • unrealized P&L LONG = (49 000 – 25 000) х 4 = 96 000$ —profit will be achieved if the position will be closed right now.

Commission fees are not taken into account in the Unrealized P&L on the exchange, and therefore they are calculated separately.

Further, a small educational program for novice traders, allowing you to understand who is who in this difficult market.

Maximum Drawdown

In trading, the term drawdown is usually applied to a depletion of the deposit on a trading account, meaning that it decreased as a result of unprofitable trades. Drawdown is one of the components of the activity of any trader who does this work professionally.

Types of drawdown:

1.   Floating or current. This happens when a position was opened, but the current loss was not executed. Until the position is closed, the drawdown decreases or turns into profit, or increases, and can even provoke the closing of the position by a margin call.

2.   Fixed, arising after execution of the stop-loss order.

In addition, in the process of testing trading strategies, the word drawdown is used as follow:

1.   Absolute - showing how much the trading deposit decreased while testing was in progress.

2.   Maximum - used to display the maximum value relative to the amount that took place during testing.

3.   Relative in essence is the same as a maximum but expressed in a percentage.

Exchange Bot

This name was invented for automated trading and initiating algorithmic transactions on the exchange. The user has to set certain parameters.

The robots collect and analyze data related to the market conditions. They calculate the expected outcome of the transaction and the level of profitability. The exchange bots enable users to execute more than a dozen transactions within one day.

Pros of automated trading:

  • No more watching and analyzing complicated charts.
  • Bots are not displaying any emotions even in the toughest market conditions.
  • The algorithm will be followed by the bot no matter what.
  • Bots are responding to the market signals without any delays.

But, there are a few cons:

  • No guarantee, the Bot will respond properly to the extreme market conditions.
  • High cost, which may include the cost of purchasing the software, the subscription fee f as well as adding commissions to the broker servicing the account.

Type of Bots

To adjust to the needs of specific users, the developers create different bots.

Different types of bots:

1.   Indicatorless - used by users with a certain experience. According to the Martingale rule, bets are raised until a take profit is executed.

2. News-based. The bot finds key events in the news feed, which most likely will move the market in a certain direction.

3.   Arbitrage — using the price spread of the same assets on different exchanges.

4.   Averaging - transactions are executed based on averaged indicators.

5.   Multicurrency - a very expensive bot. The program analyzes the movement of various currency pairs, risks mitigated by using hedging.

6.   Trending - the bot identifies the trend lines.

7. Flat-trading is carried out without going beyond the horizontal price corridor, calculated using oscillators.

8.   Scalping, when a bot opens many trades with short stops.


Every investor who wants to use a trader or a bot to increase their deposit must conduct due diligence. It is important to understand the basic principles of trading in financial markets, as well as to learn how to analyze trading statistics and results over long and short periods of time.


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